By Aaron Stover
The Heartland Institute joined a coalition urging Congress to support the Maximizing America’s Prosperity (MAP) Act sponsored by Rep. Kevin Brady (R-TX-8) and Sen. Mike Braun (R-IN).
Heartland and 25 other groups sent a letter to Congress calling for support of this legislation, which would cap federal spending as a percentage of potential gross domestic product (GDP) and provide a “debt brake” to stop unsustainable federal spending. The effort is being led by FreedomWorks.
The debt brake concept has an international precedent, with Swiss voters having passed an initiative in 2001 to ensure central government spending does not exceed revenue trends over a multiyear period (to allow for temporary deficit spending when truly necessary). Since the law was introduced, Swiss debt has significantly declined and the debt-to-GDP ratio has remained stable in the 40-percentile range, far lower than that of most advanced economies.
The call for fiscal restraint comes at a time when our national debt exceeds $28T and is the highest level relative to GDP since World War II, an unprecedented peacetime mark in our nation’s history. The Compact for America Educational Foundation maintains the Debt Default Clock, a tool designed to help the public understand the threat our debt poses to the country’s economic health. The organization recently issued a press release assessing our debt default position as “three minutes to midnight,” meaning three factors each keep us “one minute” from federal debt default.
Firstly, gross federal interest payments have been projected below 15 percent of federal revenues during the ten-year budget period (though the site points out these costs are projected to rise). The second factor is the ratio of publicly held debt is less than 80 percent of gross debt, but again this is expected to change in 2023. The third and final factor is federal revenues exceeding 17.5 percent of GDP. The organization warns that these factors are temporary, and it projects a fiscal crisis as soon as 2026.
Last year, economics professors and Heartland Institute Policy Advisors John Merrifield and Barry Poulson released a Heartland Policy Brief titled “How to Solve America’s Debt Crisis in the Wake of the Coronavirus Pandemic.” The authors recognized the response necessitated by the severe economic impact of the coronavirus pandemic, but they called for a post-pandemic “phase two” plan that would balance the budget and use surplus revenues to reduce debt. The authors also recalled the success of the Swiss debt brake and applied a comparable dynamic simulation model to the U.S. economy, showing a modest reduction in spending could achieve the same results.
“The growth in federal debt in response to the financial crisis and now the coronavirus pandemic is unprecedented,” Merrifield and Poulson told Heartland Daily News. “While the economy is now recovering, the long-term prospects are for higher interest rates, higher inflation, and retardation in economic growth. Most other developed countries have restored a sustainable trajectory for public debt, but the U.S. has not. As Herb Stein famously said, ‘Things that can’t go on will stop.’ U.S. debt will continue to grow until it stops!” The authors recently addressed this topic in their book A Fiscal Cliff: New Perspectives on the U.S. Federal Debt Crisis.
The April jobs report by the U.S. Bureau of Labor Statistics was highly disappointing, and recent spikes in commodity prices such as gasoline and lumber indicate price inflation may be developing after a decade of massive federal spending and quantitative easing by the Federal Reserve.
The combination of a poor employment picture and inflationary risks recalls the “misery index” and “stagflation” of the 1970s. Despite many expectations for a post-pandemic boom, if the Federal Reserve is forced to boost interest rates to address inflation, what is now a debt problem could balloon into a debt crisis and more than cancel any expected gains.
On top of that gloomy prospect looms the risk of foreign debt holders such as China and Japan losing their appetite for U.S. Treasury notes. Policymakers may wish to consider the aphorism “an ounce of prevention is worth a pound of cure,” as Merrifield and Poulson argue.